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Building the Dream Team: Strategic Steps for Forming a Successful VC Firm

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Building the Dream Team: Strategic Steps for Forming a Successful VC Firm


The process of "Forming a Team" is the foundation for successful (or unsuccessful) investment. At this particular stage it would be critical (in my view) to keep the talent density close to 100%. This stage is also important for executing the fund's thesis and achieving top decile returns. 

As a process it has teamwork, domain expertise, and long-term relationship building (networking) & nurturing skills. Therefore, a well-structured & cohesive team has the capability to make/break the success of the fund. Considering the past track record & future potential. Also culture, promoting diverse perspectives and encourage healthy debate; and finally Diversity, where teams tend to outperform homogeneous people as they bring different perspectives to the table.

 

What are the high level steps to create a VC firm

  • Writing the Thesis
  • Forming a Team
    • Identify potential partners that who are known by the team for years
    • Develop a target list with those that are a fit with the Thesis
    • Organize a series of brainstorming sessions with the targets
    • Evaluate if a target is a partner or venture partner candidate
    • Determine target’s commitment to the fund’s goals and values
    • Discuss an offer with the target to gauge interest
    • Test the target for a month or two
    • Make the official offer after the fund is formed
  • Completing Fund Formation
  • Pitching Limited Partners
  • Closing a Deal
  • Preparing the Annual Report
  • Assisting Portfolio Companies
  • Helping with an Exit
  • Distributing Proceeds


Zoom into the step: How to form an outstanding team for a VC firm

Following are the detailed outline and sub steps involved in the project of Forming a (Venture) Team:

Identify potential partners that who are known by the team for years

  • Make a Partner Score Matrix (expertise, commitment, willingness to contribute to the fund, etc) from 1 (unlikely) to 10 (I want this person asap) that can be used to assign a weight to each vertical and calculate the total score for each candidate. This may include objective as well as subjective (gut) score.
  • Review the professional network of the existing team members; friends, former colleagues potential good fit
  • Identify individuals with whom there are longstanding relationships
  • Consider people who have a history of collaboration or shared successes
  • Look for people with complementary skills and experience, with a diverse range experience/perspective
  • Continuous: increase network size, other VCs & startup founders, entrepreneurs
  • Check if the person's share same values and approach to investing as of the fund’s thesis.
  • Assess their commitment


Develop a target list with those that are a fit with the Thesis

  • Define the a (thesis specific?) criteria that potential partners should meet based thesis, industry expertise, geographic focus, and fund's strategy.
  • Create a comprehensive list of potential partners who meet these criteria.
  • Review list of potential partners and select the best fit after considering the criteria (skills, experience, values, and commitment/etc)
  • Shortlist to 5-10 people (easier to evaluate 1:1)
  • Adjust the Partner Score Matrix when required, improvise


Organize a series of brainstorming sessions with the targets

  • Schedule meetings or brainstorming sessions with potential partners to discuss the fund's vision and goals (could be informal & relaxed to get their insights & feedback).
  • Prepare some discussion topics ahead of time (focused/productive)
  • Explore potential synergies and areas of collaboration, and how they can contribute to fund's success
  • Take notes during the brainstorming sessions
  • After, review notes, identify the key takeaways and assign a weights to Partner Score Matrix

Evaluate if a target is a partner or venture partner candidate

  • Review the score and see if a potential partner is a good fit
  • Talk to other people who know the potential partners.
  • Assess own (and other founders) relationship with each potential partner
  • Update Partner Score Matrix based on data so far


Determine target’s commitment to the fund’s goals and values

  • Engage in candid discussions with potential partners about their commitment to the fund's mission and values
  • Assess their alignment with the fund's long-term objectives and vision
  • Ensure that they share the fund's core principles
  • Review matrix and make final decision (invite/no-invite)


Discuss an offer with the target to gauge interest

  • Initiate discussions about joining the venture capital team
  • Present a preliminary offer or proposal, outlining the role, equity share, and terms
  • Gauge the potential partner's level of interest and willingness to move forward.
  • Update matrix


Test the target for a month or two

  • Start trial / probationary period, monitor
  • Evaluate their overall contributions and update the matrix
  • Review matrix and make final decision (go/no-go)


Make the official offer after the fund is formed

  • Formal offer to join the team
  • Specify the terms, responsibilities, and equity arrangement.
  • Ensure offer aligns with the fund's legal and operational requirements


How to create a startup investment process for a target firm?


Lets go through an example. 

Company name: Good Capital LLC

Process: Startup Investment Process for Good Capital LLC

Step 1: Sourcing and Screening

  • Good Capital LLC sources potential investment opportunities through a variety of channels, including:
  • Referral network: Good Capital has a large network of contacts in the startup and venture capital industries. This network includes founders, CEOs, VCs, and other professionals who can refer Good Capital to promising investment opportunities.
  • Online platforms: Good Capital also uses online platforms such as AngelList, Crunchbase, and LinkedIn to identify potential investment opportunities.
  • Startup events: Good Capital attends startup events and conferences to meet with founders and learn about their companies.
  • Screening criteria: large and growing market, differentiated product, experienced team, and a business plan that makes sense.


Step 2: Due Diligence

  • When a company passes the initial screening, Good Capital will conduct a thorough due diligence process to learn more about the company and its business. This process would include:
    • Review business plan, financial statements, and other relevant docs
    • Meetings with the company's founders and management team
    • Backroung reference checks with their customers, partners, and investors/etc.
  • Good Capital will also conduct market research to assess the size and growth potential, and competitive landscape.


Step 3: Investment Decision

  • Once Good Capital has completed their due diligence, they will make an investment decision.
  • If Good Capital decides to invest in the company, they will negotiate an investment agreement that talks about:
    • terms of the investment
    • amount of investment
    • current valuation
    • rights and responsibilities of the company and Good Capital
    • could also consider: impact investing, sustainability, diversity and inclusion


Step 4: Post-Investment Support

  • After Good Capital has invested in a company, they will provide the company with ongoing support and guidance, for instance: advice, mentorship, networking, fundraising, resources and expertise.


Good Capital is committed to helping their portfolio companies succeed. We believe that by providing our portfolio companies with the support they need, we can generate superior returns for investors.


In retrospect, I hope you've learned a little about various aspects of vc space, including investment process, traditional and venture builders. Gain experience working at a VC firm.